Trusts sound complicated and wealthy—something for the ultra-rich. But trusts serve important purposes for many middle-class families too. Understanding when a trust makes sense can save your family significant time, money, and stress.
What Is a Trust?
A trust is a legal arrangement where:
- A grantor (you) transfers assets to the trust
- A trustee manages those assets
- Beneficiaries receive the benefits
Think of it as a container for your assets with instructions on how to manage and distribute them.
Key players:
- Grantor/Settlor: Creates and funds the trust
- Trustee: Manages trust assets according to instructions
- Beneficiary: Receives trust benefits
- You can be all three while alive (common with revocable trusts)
Revocable Living Trust: The Most Common Type
A revocable living trust is:
- Created while you're alive
- Can be changed or canceled anytime
- You typically serve as trustee
- You name a successor trustee
- Assets transfer automatically at death
Why Create a Revocable Living Trust?
Avoid probate
- Assets in trust don't go through probate court
- Faster distribution to beneficiaries
- No public record of assets
- Saves probate costs (can be 3-7% of estate)
Incapacity planning
- Successor trustee takes over if you can't manage affairs
- No court involvement needed
- Seamless transition
Privacy
- Wills become public record in probate
- Trusts remain private
Multi-state property
- Avoids probate in each state where you own property
When Maria's father died, his $400,000 estate went through probate. It took 18 months, cost $25,000 in legal fees, and everything became public record. Her mother later set up a living trust—when she passed, assets transferred to Maria within weeks, privately, for minimal cost.
When a Revocable Trust Makes Sense
Good candidates:
- Homeowners (especially in high-probate-cost states)
- Those with property in multiple states
- Privacy-conscious individuals
- Those wanting smooth incapacity transitions
- Estates over $100,000-$200,000
May not be worth it if:
- Few assets
- Most assets pass by beneficiary designation
- Simple situation and low-cost probate state
- Cost of trust exceeds probate savings
Pro Tip
California, Florida, and New York have expensive, slow probate. Living trusts are almost always worth it in these states. Other states have simpler probate processes.
The Critical Step: Funding Your Trust
A trust is useless if it's empty. You must transfer assets into it:
Assets to transfer:
- Real estate (deed to trust)
- Bank accounts
- Investment accounts
- Business interests
- Valuable personal property
Assets typically NOT transferred:
- Retirement accounts (would trigger taxes)
- (name trust as beneficiary instead)
- Vehicles (can be, but often not worth the hassle)
Watch Out
An unfunded trust provides zero benefit. Many people pay for trusts and never transfer assets into them—their estates still go through probate.
Irrevocable Trusts: More Protection, Less Control
An irrevocable trust:
- Cannot be changed once created (with limited exceptions)
- Assets are no longer "yours"
- Provides stronger asset protection
- Can reduce estate taxes
- Used for specific planning purposes
Types of Irrevocable Trusts
Irrevocable Life Insurance Trust (ILIT)
- Holds life insurance policies
- Death benefit excluded from taxable estate
- Saves estate taxes on large policies
Charitable Trusts
- Charitable Remainder Trust: Income to you, remainder to charity
- Charitable Lead Trust: Income to charity, remainder to heirs
- Tax benefits for charitable giving
Special Needs Trust
- Provides for disabled beneficiary
- Doesn't disqualify them from government benefits
- Essential for special needs planning
Spendthrift Trust
- Protects beneficiaries from creditors
- Protects beneficiaries from themselves
- Trustee controls distributions
Generation-Skipping Trust
- Passes assets to grandchildren
- Avoids estate tax at children's generation
- Complex but can save significant taxes
Testamentary Trust: Created by Your Will
A testamentary trust:
- Created by instructions in your will
- Only comes into existence at your death
- Goes through probate (it's part of the will)
- Useful for controlling inheritance
Common uses:
- Minor children (assets held until specified age)
- Spendthrift beneficiaries
- Second marriages (provide for spouse, then children)
Do This
Consider a testamentary trust for minor children even if you don't need a living trust. "Assets to my children at age 25" is better than "assets to my children immediately" if they're young.
Trust vs. Will: Key Differences
| Feature | Will | Revocable Trust |
|---|---|---|
| Probate | Yes | No |
| Public record | Yes | No |
| Incapacity coverage | No | Yes |
| Cost to create | Lower | Higher |
| Ongoing maintenance | None | Some |
| Effective when | Death | Immediately |
Cost of Setting Up a Trust
DIY options: $300-$500
- Trust & Will
- LegalZoom
- Best for simple situations
Attorney-drafted:
- Simple trust: $1,500-$3,000
- Complex trust: $3,000-$10,000+
- Includes related documents and funding guidance
Consider total value: If trust saves $15,000 in probate costs on a $300,000 estate, the $2,000 attorney fee is worth it.
Naming Trustees
While You're Alive (Revocable Trust)
- Usually yourself as trustee
- Name successor trustee
Successor Trustee Qualities
- Trustworthy and competent
- Good with money and paperwork
- Willing to serve
- Available when needed
Institutional Trustees
Banks and trust companies can serve as trustee:
- Professional management
- No conflicts of interest
- Expensive (often 1%+ annually)
- Best for complex situations or no suitable individual
Common Trust Mistakes
Avoid This
- Not funding the trust - Empty trusts don't avoid probate
- Wrong trustee choice - Pick someone capable and willing
- DIY for complex situations - Get professional help
- Forgetting to update - Life changes require trust amendments
- Assuming trust is fireproof - Trusts can still be challenged
- Ignoring pour-over will - Catches assets not in trust
The Pour-Over Will
Even with a trust, you need a pour-over will:
- Catches any assets not transferred to trust
- Directs them into the trust at death
- Names guardians for minor children
- These assets do go through probate
Is a Trust Right for You?
Likely yes if:
- You own a home in a high-probate-cost state
- You own property in multiple states
- You want to avoid incapacity court proceedings
- You value privacy
- You have complex distribution wishes
- Your estate exceeds $200,000-$500,000
Probably unnecessary if:
- Most assets pass by beneficiary designation
- You're in a low-cost probate state
- Your estate is simple and small
- You're young with few assets
Quick Win
Schedule a consultation with an estate planning attorney to discuss whether a trust makes sense for your situation. Many offer free initial consultations. Come prepared with a list of your assets and your goals.